Education and economic growth: The role of institutions

Economic theory and empirical research link economic growth with education, a key component of human capital. Yet high levels of education do not guarantee economic growth if a weak institutional environment hinders the productive use of knowledge and skills. By studying the nexus between institutions and education in different countries, we conclude that weak institutions are usually paired with low levels of education. Some post-socialist countries, as well as a number of other countries with relatively high levels of education that have experienced institutional deterioration after major crises are among exceptions. The argument about the unproductive use of human capital due to institutional problems is most applicable to such countries. Using system GMM on a panel of 134 countries over the period 1970—2015, we obtain significant positive estimates of the impact of both institutions and education on economic growth. Our results indicate that weak institutions markedly constrain economic growth even in countries with educated population.